CPMD 10-Q
Cannapharmarx, Inc. (CPMD)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly
period ended
or
For the transition period from ___________to ___________
Commission File Number:
(Exact name of small business issuer as specified in its charter)
| (State of other jurisdiction of incorporation) | (IRS Employer ID No.) |
(Address of principal executive offices)
(Issuer’s Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| OTC Pink Sheets |
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days:
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act. ☐ Yes
The number of shares of the registrant’s common stock issued and outstanding as of June 25, 2024, was shares.
CANNAPHARMARX, INC.
March 31, 2024
TABLE OF CONTENTS
| Page | ||
| PART I. FINANCIAL INFORMATION | ||
| Item 1 | Financial Statements (unaudited) | 3 |
| Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations/Plan of Operation | 19 |
| Item 3 | Quantitative and Qualitative Disclosures About Market Risk | 25 |
| Item 4 | Controls and Procedures | 25 |
| PART II. OTHER INFORMATION | ||
| Item 1 | Legal Proceedings | 27 |
| Item 1A | Risk Factors | 27 |
| Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds | 27 |
| Item 3 | Defaults Upon Senior Securities | 27 |
| Item 4 | Mine Safety Disclosures | 28 |
| Item 5 | Other Information | 28 |
| Item 6 | Exhibits | 28 |
| Signatures | 29 |
| 2 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CANNAPHARMAX, INC.
CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS
| March 31, 2024 (Unaudited) | December 31, 2023 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Goods and services tax receivable | ||||||||
| Accounts receivable | ||||||||
| Inventory | ||||||||
| Total current assets | ||||||||
| Non-current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Right-of-use building, net | ||||||||
| Investments | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Accrued interest | ||||||||
| Accrued legal settlement | ||||||||
| Notes payable | ||||||||
| Convertible notes - net of discount | ||||||||
| Derivative liability | ||||||||
| Loan payable - related party | ||||||||
| Liability for right-of-use building, current portion | ||||||||
| Obligation to issue shares | ||||||||
| Total current liabilities | ||||||||
| Non-current liability | ||||||||
| Liability for right-of-use building | ||||||||
| Total liabilities | ||||||||
| STOCKHOLDERS’ DEFICIT | ||||||||
| Preferred stock series A, $ par value, shares authorized, and issued and outstanding as at March 31, 2024 and December 31, 2023, respectively | ||||||||
| Preferred stock series B, $ par value, shares authorized, and shares issued and outstanding as at March 31, 2024 and December 31, 2023, respectively | ||||||||
| Preferred stock series C, $ par value, shares authorized, shares issued and outstanding as at March 31, 2024 and December 31, 2023 | ||||||||
| Common stock, $ par value; shares authorized, and issued and outstanding as at March 31, 2024 and December 31, 2023, respectively | ||||||||
| Treasury stock, $ par value shares as at March 31, 2024 and December 31, 2023 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income (loss) | ( | ) | ||||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
| 3 |
CANNAPHARMAX, INC.
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Revenue | $ | $ | ||||||
| Cost of goods sold | ||||||||
| Gross loss | ( | ) | ||||||
| Operating expenses | ||||||||
| Depreciation | ||||||||
| General and administrative | ||||||||
| Payroll and consulting fees | ||||||||
| Professional fees | ||||||||
| Rent | ||||||||
| Stock-based compensation | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other income (expenses) | ||||||||
| Change in the fair value of derivative liability | ( | ) | ||||||
| Change in the fair value of obligation to issue shares | ( | ) | ||||||
| Gain (loss) on the extinguishment of debt | ( | ) | ||||||
| Interest expense | ( | ) | ( | ) | ||||
| Loss on impairment of investment | ( | ) | ||||||
| Loss on impairment of inventory | ( | ) | ||||||
| Total other expenses | ( | ) | ( | ) | ||||
| Net loss | ( | ) | ( | ) | ||||
| Foreign currency translation adjustment | ( | ) | ||||||
| Net comprehensive loss | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted loss per share of common stock | $ | ) | $ | ) | ||||
| Weighted average number of common stock outstanding | ||||||||
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
| 4 |
CANNAPHARMAX, INC.
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Amortization of debt discount | ||||||||
| Depreciation | ||||||||
| Change in the fair value of derivative liability | ( | ) | ||||||
| Change in the fair value of obligation to issue shares | ||||||||
| Interest expense | ||||||||
| (Gain) loss on extinguishment of debt | ( | ) | ||||||
| Loss on impairment of investment | ||||||||
| Loss on impairment of inventory | ||||||||
| Stock-based compensation | ||||||||
| Changes in operating assets and liabilities: | – | |||||||
| Goods and services tax receivable | ( | ) | ( | ) | ||||
| Accounts receivable | ( | ) | ||||||
| Prepaid expenses | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Other assets | ||||||||
| Accounts payable and accrued liabilities | ||||||||
| Accrued interest | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Investing activity | ||||||||
| Purchases of property, plant and equipment | ( | ) | ||||||
| Net cash used in investing activity | ( | ) | ||||||
| Financing activities | ||||||||
| Issuance of warrants | ||||||||
| Proceeds from related party loans | ||||||||
| Proceeds from convertible notes | ||||||||
| Repayment of convertible notes | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Effects of exchange rates on cash | ||||||||
| Net change in cash | ( | ) | ||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash interest paid | $ | $ | ||||||
| Supplemental disclosure of non-cash flow investing and financing activities: | ||||||||
| Cancellation of preferred stock series B | $ | $ | ||||||
| Conversion of preferred stock series A into common stock | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
| 5 |
CANNAPHARMAX, INC.
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
(Unaudited)
| Preferred stock series A | Preferred stock series B | Preferred stock series C | Common stock | |||||||||||||||||||||||||||||
| Number | Number | Number | Number | |||||||||||||||||||||||||||||
| of shares | Value | of shares | Value | of shares | Value | of shares | Value | |||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Conversion of preferred stock series B to common stock | – | ( |
) | ( |
) | – | ||||||||||||||||||||||||||
| Conversion of convertible notes to common stock | – | – | – | |||||||||||||||||||||||||||||
| Stock based compensation related to warrant issuances | – | – | – | – | ||||||||||||||||||||||||||||
| Change in foreign currency translation | – | – | – | – | ||||||||||||||||||||||||||||
| Net loss | – | – | – | |||||||||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Issuance of warrants for LTB investment | – | – | – | – | ||||||||||||||||||||||||||||
| Conversion of convertible notes to common stock | – | – | – | |||||||||||||||||||||||||||||
| Common stock returned to treasury | – | – | – | ( |
) | ( |
) | |||||||||||||||||||||||||
| Stock based compensation related to warrant issuances | – | – | – | – | ||||||||||||||||||||||||||||
| Issuance of preferred stock series C for LTB investment | – | – | – | |||||||||||||||||||||||||||||
| Correction of an error | – | – | – | – | ||||||||||||||||||||||||||||
| Change in foreign currency translation | – | – | – | – | ||||||||||||||||||||||||||||
| Net income | – | – | – | – | ||||||||||||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Cashless issue of common stock | – | – | – | |||||||||||||||||||||||||||||
| Conversion of preferred stock series A to common stock | ( |
) | ( |
) | – | – | ||||||||||||||||||||||||||
| Cancellation of preferred stock series B | – | ( |
) | ( |
) | – | – | |||||||||||||||||||||||||
| Conversion of convertible notes to common stock | – | – | – | |||||||||||||||||||||||||||||
| Issuance of warrants for convertible notes | – | – | – | – | ||||||||||||||||||||||||||||
| Adjustment to issuance of preferred stock series C for LTB investment | – | – | – | ( |
) | – | ||||||||||||||||||||||||||
| Change in foreign currency translation | – | – | – | – | ||||||||||||||||||||||||||||
| Net loss | – | – | – | – | ||||||||||||||||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Treasury stock | Additional | Accumulated other comprehensive |
Total | |||||||||||||||||||||
| Number | paid-in | Accumulated | income | stockholders’ | ||||||||||||||||||||
| of shares | Value | Capital | deficit | (loss) | deficit | |||||||||||||||||||
| Balance, December 31, 2022 | $ | ( |
) | $ | $ | ( |
) | $ | $ | ( |
) | |||||||||||||
| Conversion of preferred stock series B to common stock | – | |||||||||||||||||||||||
| Conversion of convertible notes to common stock | – | |||||||||||||||||||||||
| Stock based compensation related to warrant issuances | – | |||||||||||||||||||||||
| Change in foreign currency translation | – | ( |
) | ( |
) | |||||||||||||||||||
| Net loss | – | ( |
) | ( |
) | |||||||||||||||||||
| Balance, March 31, 2023 | $ | ( |
) | $ | $ | ( |
) | $ | $ | ( |
) | |||||||||||||
| Issuance of warrants for LTB investment | – | |||||||||||||||||||||||
| Conversion of convertible notes to common stock | – | |||||||||||||||||||||||
| Common stock returned to treasury | ||||||||||||||||||||||||
| Stock based compensation related to warrant issuances | – | ( |
) | ( |
) | |||||||||||||||||||
| Issuance of preferred stock series C for LTB investment | – | |||||||||||||||||||||||
| Correction of an error | – | ( |
) | |||||||||||||||||||||
| Change in foreign currency translation | – | ( |
) | ( |
) | |||||||||||||||||||
| Net income | – | |||||||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||||||
| Cashless issue of common stock | – | ( |
) | |||||||||||||||||||||
| Conversion of preferred stock series A to common stock | – | |||||||||||||||||||||||
| Cancellation of preferred stock series B | – | |||||||||||||||||||||||
| Conversion of convertible notes to common stock | – | |||||||||||||||||||||||
| Issuance of warrants for convertible notes | – | |||||||||||||||||||||||
| Adjustment to issuance of preferred stock series C for LTB investment | – | |||||||||||||||||||||||
| Change in foreign currency translation | – | |||||||||||||||||||||||
| Net loss | – | ( |
) | ( |
) | |||||||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | ( |
) | $ | $ | ( |
) | |||||||||||||||
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
| 6 |
|
CANNAPHARMARX, INC. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 |
NOTE 1 - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
CannaPharmaRX Inc. (“CPRX” or the “Company”) was originally incorporated in the state of Colorado in August 1998 as Network Acquisitions, Inc. The Company focuses its business efforts on evaluation, negotiation, acquisition, and development of cannabis cultivation projects in Canada.
On January 6, 2022, the Company entered into a 20-year operating lease with Formosa Mountain Ltd. for the use of a leased facility located in Cremona, Alberta, Canada. The facility was built in 2015 and was previously operating as a cannabis production facility until it was decommissioned, and the license cancelled by the previous owner making the facility ready for sale in 2020.
CPRX recommissioned the 55,000 square foot facility which contains 11 growing rooms and 10 drying and packing rooms into a new indoor cannabis farm during 2022. The Company received an operating license from Health Canada on December 9, 2022, and a cannabis license from the Canada Revenue Agency (“CRA”) on December 22, 2022.
On February 21, 2023, the Company entered into a supply agreement with Y.S.A. Holdings Ltd (“Y.S.A.”), an Israeli corporation, whereby the Company will supply 450kg of cannabis biomass in the form of dried flowers and dried trim per annum to Y.S.A over a two-year period. No biomass has been delivered to Y.S.A as at the date of this Report.
Preliminary discussions with export partners would set conditional per gram pricing at approximately $3.30 Canadian dollars (“CAD”) per gram. This price would be based on achieving satisfactory test results associated to tetrahydrocannabinol (“THC”) and cannabidiol (“CBD”) content of the dried flower.
Basis of presentation
The accompanying financial statements have been prepared in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification, the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“US GAAP”).
All figures are in United States (“US”) dollars (“USD”) unless indicated otherwise.
Use of estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. The most significant estimates relate to the purchase price allocation of acquired businesses, the impairment of long-lived assets, the valuation of financial instruments, the provision of income taxes and contingencies. The Company bases its estimates on historical experience, known or expected trends, and various other assumptions that are believed to be reasonable given the quality of information available as at the date of these financial statements. The results of these assumptions provide the basis for making estimates about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
Cash
The Company considers all its cash in bank accounts
and its highly liquid temporary cash investments with an original maturity of three months or less to be cash and cash equivalents. On
March 31, 2024, the Company had cash of $
Comprehensive income or loss
ASC 220 Comprehensive Income establishes standards for the reporting and display of comprehensive income and its components in the financial statements. As at March 31, 2024, and December 31, 2023, the Company determined that it had items that represented components of comprehensive income and therefore has included a statement of comprehensive income in the financial statements.
| 7 |
|
CANNAPHARMARX, INC. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 |
NOTE 1 - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventory
Inventory is valued at the lower of cost and net realizable value, with cost determined using the weighted average cost method. Net realizable value is calculated as the estimated selling price in the ordinary course of business, less any estimated costs to complete and sell the goods. Costs are capitalized to inventory, until substantially ready for sale. Costs include direct and indirect labor, raw materials, consumables, packaging supplies, utilities, facility costs, quality and testing costs, production related depreciation, and other overhead costs.
Leases
The Company recognizes right-of-use assets and corresponding liabilities for leases with terms greater than 12 months or leases that contain a purchase option that is reasonably certain to be exercised as either operating or finance leases at the inception of an agreement where it is determined that a lease exists. This classification of operating or finance lease determines the presentation of corresponding expenses over the lifetime of the lease.
Finance lease assets represent the right to use an underlying asset for the lease term, and finance lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are recognized based on the present value of future payments over the lease term at commencement date. A collateralized incremental borrowing rate based on the information available at commencement date, including lease term, is used in determining the present value of future payments. This incremental borrowing rate is updated in the event of a lease modification such as a renewal or option that adds time and payments to a lease. A lease term generally does not include an option to extend or terminate the lease, unless there is a reasonable certainty that the option will be exercised. Fixed payments may contain predetermined fixed rent escalations. The Company recognizes the expense related to finance leases using the effective interest rate method from the commencement date to the end of the lease term. Certain lease contracts contain non-lease components such as maintenance, utilities, fuel and other services. The Company recognizes both the lease and non-lease component for each right-of-use asset.
Short-term leases (that have an initial term less than 12 months or that are cancellable by the lessor and lessee without significant penalties) are expensed as they are incurred.
Derivative financial instruments
Terms of convertible and other promissory notes
are reviewed to determine whether they contain embedded derivative instruments that are required to be accounted for separately from the
host contract and recorded on the balance sheet at fair value. The fair value of derivative instruments is required to be revalued at
each reporting date, with corresponding changes in fair value recorded in the current period operating results. Derivative liabilities
arose due to the issuance of variably priced convertible notes. For the three months ended March 31, 2024, the Company had derivative
liabilities of $
The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risk.
Revenue Recognition
The Company recognizes revenue from the sale of products in accordance with ASC 606, “Revenue Recognition” following the five steps procedure:
Step 1: Identify the contract(s) with customers - The invoice has been generated and provided to the customer.
Step 2: Identify the performance obligations in the contract - The performance obligations of delivery of products are stated in the invoice.
Step 3: Determine the transaction price - The transaction price has been identified in the invoice.
Step 4: Allocate the transaction price to performance obligations - The Company has allocated the transaction price to performance obligation in the invoice.
Step 5: Recognize revenue when the entity satisfies a performance obligation - The Company has shipped out the product and, therefore, satisfied the performance obligation. The risk of loss passed to the customers at the point of shipment.
| 8 |
|
CANNAPHARMARX, INC. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 |
NOTE 1 - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign currency translation
The functional currency and the reporting currency of the Company’s US operations is USD. The functional currency of the Company’s Canadian operations is CAD. Management adopted ASC 830 Foreign Currency Matters for transactions that occur in foreign currencies. Monetary assets denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. Average monthly rates are used to translate revenues and expenses.
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.
Assets and liabilities of the Company’s operations are translated into the reporting currency, USD, at the exchange rate in effect at the balance sheet dates. Revenue and expenses are translated at average rates in effect during the reporting periods. Equity transactions are recorded at the historical rate when the transaction occurred. The resulting translation adjustment is reflected as accumulated other comprehensive income, a separate component of stockholders' deficit in the statements of changes in stockholders' deficit.
These translation adjustments are reflected in accumulated other comprehensive income, a separate component of the Company's stockholders' deficit.
Harmonized sales tax
The Canadian Goods and Services Tax (“GST”) is a 5% tax applied to taxable goods and services. GST is a consumption tax paid by the consumer at the point of sale The vendor or seller collects the tax proceeds from consumers by adding the GST rate to the cost of goods and services. They then remit the total collected tax, less input tax credits for GST paid to vendors, to the government periodically.
The GST is in effect Canada-wide, although is sometimes combined with a Provincial Sales Tax and referred to as a Harmonized Sales Tax. The GST is collected by the Canada Revenue Agency, which remits the appropriate amounts to the participating provinces.
The Company has adopted ASC Topic 718 Compensation - Stock Compensation, which establishes a fair value method of accounting for stock-based compensation plans. In accordance with guidance now incorporated in ASC Topic 718, the fair value of stock options and warrants issued to employees and non-employees is measured on the grant date based on the fair value. The fair value is determined using the Black-Scholes option pricing model. The resulting amount is charged to expense on a straight-line basis over the period in which the Company expects to receive the benefit, which is generally the vesting period. The fair value of share purchase warrants was determined at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires management to make various estimates and assumptions, including expected term, expected volatility, risk-free rate, and dividend yield. The Company had stock options outstanding as at March 31, 2024 or December 31, 2023.
Long-lived assets
The Company evaluates the recoverability of its long-lived assets whenever events or changes in circumstances have indicated that an asset may not be recoverable. The long-lived asset is grouped with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the sum of the projected undiscounted cash flows is less than the carrying value of the assets, the assets are written down to the estimated fair value.
Fair values of assets and liabilities
The Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value.
| 9 |
|
CANNAPHARMARX, INC. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 |
NOTE 1 - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
| Level 1: | Valuation is based on quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. | |
| Level 2: | Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. For example, Level 2 assets and liabilities may include debt securities with quoted prices that are traded less frequently than exchange-traded instruments. | |
| Level 3: | Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain private equity investments and long-term derivative contracts. | |
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Financial instruments
The estimated fair value for financial instruments was determined at discrete points in time based on relevant market information. These estimates involve uncertainties and could not be determined with exact precision. The fair value of the Company’s financial instruments, which include cash, prepaid expenses, accounts payable, and the related party loan, each approximate their carrying value due either to their short length to maturity or interest rates that approximate prevailing market rates.
Income taxes
The Company accounts for income taxes under the liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
Earnings (loss) per share is presented in accordance with Accounting Standards Update (“ASU”), Earnings per Share (Topic 260), which requires the presentation of both basic and diluted earnings per share (“EPS”) on the income statements.
Basic EPS excludes any dilutive effects of options, warrants, and convertible securities but does include the restricted shares of common stock issued. Basic EPS calculations are determined by dividing net income by the weighted average number of shares of common stock outstanding during the year.
Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted to common stock. Diluted EPS calculations are determined by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding.
Recently issued accounting pronouncements
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new pronouncements that have been issued that might have a material impact on its financial position or results of operations.
| 10 |
|
CANNAPHARMARX, INC. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 |
NOTE 2 - GOING CONCERN AND LIQUIDITY
As at March 31, 2024, the Company had cash of
$
These financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. Based on current financial projections, the Company does not have sufficient existing cash resources to fund its current limited operations. Accordingly, there is substantial doubt about the Company’s ability to continue as a going concern.
It is the Company’s intention to incur debt and/or raise additional funding through equity financing to fund ongoing operating expenses. There is no assurance that these events will be satisfactorily completed or at terms acceptable to the Company. Any issuance of equity securities, if accomplished, could cause substantial dilution to existing stockholders. Any failure by the Company to successfully implement these plans would have a material adverse effect on its business, including the possible inability to continue operations.
NOTE 3 - INVENTORY
A summary of the Company’s inventory as at March 31, 2024, and December 31, 2023 is as follows:
| 2024 | 2023 | |||||||
| Finished goods | $ | $ | ||||||
| Work in process | ||||||||
| Total | $ | $ | ||||||
During the three months ended March 31, 2023,
the Company recorded a loss on inventory impairment of $
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
A summary of the Company’s property, plant and equipment as at March 31, 2024 is as follows:
| Gross carrying amount | Accumulated depreciation | Net book value | ||||||||||
| Computers, office and plant equipment | $ | $ | ( | ) | $ | |||||||
A summary of the Company’s property, plant and equipment as at December 31, 2023 is as follows:
| Gross carrying amount | Accumulated depreciation | Net book value | ||||||||||
| Computers, office and plant equipment | $ | $ | ( | ) | $ | |||||||
For the three months ended March 31, 2024 and
2023, the Company recorded depreciation expense of $
| 11 |
|
CANNAPHARMARX, INC. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 |
NOTE 5 - RIGHT-OF-USE BUILDING
A summary of the Company’s right-of-use building asset at March 31, 2024 and December 31, 2023 is as follows:
| 2024 | 2023 | |||||||
| Gross carrying amount | $ | $ | ||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Net book value | $ | $ | ||||||
For the three months ended March 31, 2024 and
2023, the Company recorded depreciation expense of $
NOTE 6 - INVESTMENTS
On November 22, 2023, the Company closed a deal
with LTB Management, LLC (“LTB”) whereby the Company obtained 100 Class B units of LTB in exchange for consideration of
warrants, each entitling the holder to purchase one share of common stock of the Company at $ per share until November 22, 2028; $
Contingent consideration includes a quarterly
true up of the sellers’ preferred share proportional ownership to
NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable are initially recognized at the transaction price and subsequently measured at the undiscounted amount of cash or other consideration expected to be paid. Accrued expenses are recognized based on the expected amount required to settle the obligation or liability.
A summary of the Company’s accounts payable and accrued liabilities as at March 31, 2024, and December 31, 2023 is as follows:
| 2024 | 2023 | |||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Accrued legal settlement (a) | ||||||||
| Total accounts payable and accrued liabilities | $ | $ | ||||||
| (a) |
| 12 |
|
CANNAPHARMARX, INC. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 |
NOTE 8 - NOTES PAYABLE
A summary of the Company’s notes payable as at March 31, 2024, and December 31, 2023 is as follows:
| 2024 | 2023 | |||||||
| CEBA Loan | $ | $ | ||||||
| Promissory notes (secured investors) | ||||||||
| Promissory notes (LTB Transaction) | ||||||||
| Total notes payable | $ | $ | ||||||
Due to the global COVID 19 outbreak, the Government
of Canada introduced the Canada Emergency Business Account (“CEBA”) program. CEBA provided an interest free loan (“CEBA
Loan”) of up to $60,000 CAD to eligible businesses. On September 14, 2023, the Government of Canada announced changes to the maturity
date of the CEBA Loan, which was extended to December 31, 2026. The loan will remain interest-free until January 18, 2024 with a rate
of 5% per annum being applied from January 19, 2024. Repayment of $40,000 CAD by January 18, 2024 will result in a $20,000 CAD loan forgiveness.
The CEBA Loan remained outstanding on January 18, 2024, and has been converted to a non-amortizing term loan with the full principal repayment
due on December 31, 2026. The Company received the full $60,000 CAD loan amount and as at March 31, 2024 and December 31, 2023 the Company’s
CEBA Loan balance is $
During the year ended December 31, 2021, the Company
entered into promissory note agreements with secured investors for non-interest-bearing notes maturing within 12 months with a total value
of $
NOTE 9 - CONVERTIBLE NOTES AND DERIVATIVE LIABILITY
A summary of the Company’s convertible notes is as follows:
| Balance, net of note discount, December 31, 2022 | $ | |||
| Proceeds received | ||||
| Value of conversion of notes to common shares | ( | ) | ||
| Note discount | ||||
| Balance, net of note discount, December 31, 2023 | ||||
| Proceeds received | ||||
| Value of conversion of notes to common shares | ( | ) | ||
| Repayment | ( | ) | ||
| Balance, March 31, 2024 | $ |
During the three months ended March 31, 2024 and
2023, the Company recorded a loss on conversion of $
| 13 |
|
CANNAPHARMARX, INC. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 |
NOTE 9 - CONVERTIBLE NOTES AND DERIVATIVE LIABILITY (continued)
A summary of the terms and conditions of the convertible notes outstanding as at March 31, 2024 is as follows:
| Maturity Date | Interest Rate | Conversion price | Principal at inception | Principal outstanding | ||||||||||
| $ | $ | |||||||||||||
As at March 31, 2024, the Company had $
As at the date of this Report, all convertible
notes were past their maturity date. Additionally, as a result of the late filing of previous Reports, and the loss of the Company’s
active listing in the OTC market, the penalty provisions of all convertible notes outstanding became effective. The Company estimated
that the maximum penalty provisions amounted to one time the face value of all convertible notes outstanding and recorded an accrued liability
for penalties amounting to $
The convertible notes were determined to be compound instruments, comprising separate financial instruments, being the debt obligation and the conversion option, which were bifurcated and are presented separately on the consolidated balance sheets. As the number of common shares to be issued on exercise of the conversion option is contingent on a variable share price, the conversion option has been classified as a derivative liability.
A summary of Company’s derivative liabilities as at March 31, 2024 is as follows:
| Balance, derivative liability, December 31, 2023 | $ | |||
| Changes in fair value of derivative liability | ||||
| Balance, March 31, 2024 | $ |
As at March 31, 2024 the Company had derivative
liabilities of $
A summary of the Company’s weighted average inputs used in the Black-Scholes option pricing model for derivative liabilities valuation as at March 31, 2024 is as follows:
| 2024 | ||||
| Stock price | $ | |||
| Exercise price | $ | |||
| Risk-free interest rate | ||||
| Expected volatility | ||||
| Expected life | ||||
| Expected annual dividend yield | ||||
The risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the historical volatility of its common stock to estimate the future volatility of its common stock. The expected life of the conversion feature of the notes was based on the remaining term of the notes. The expected annual dividend yield was based on the fact that the Company has not customarily paid dividends in the past and does not expect to pay dividends in the future.
| 15 |
|
CANNAPHARMARX, INC. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 |
NOTE 10 - RELATED PARTY TRANSACTIONS
A summary of the Company’s related party liabilities as at March 31, 2024, and December 31, 2023 is as follows:
| 2024 | 2023 | |||||||
| Loan payable - related party | $ | $ | ||||||
| Liability for right-of-use building, current portion | ||||||||
| Liability for right-of-use building | ||||||||
| Total loan payable, related parties | $ | $ | ||||||
The loan payable - related party is comprised
of a $
Effective January 1, 2022, the Company entered
into a lease agreement with Formosa Mountain Ltd., whose principal shareholder is also the principal shareholder of Koze, to lease a cannabis
production facility in Cremona, Alberta, Canada. The facility is a 55,000 square foot, 6,000 kg per year plant, built in 2015. The lease
payments are $82,500 CAD per month increasing by 5% each year. The lease has a 20-year term. As at March 31, 2024, and December 31, 2023,
the Company was in arrears by $
Effective February 1, 2023, the Company entered
into a lease agreement to lease one office at Suite 3600, 888 5th Avenue SW, Calgary, Alberta, Canada, T2P 3R7. The rent is
$500 CAD per month. This space was provided by a company to which Mr. Orman, one of the Company’s directors, serves as a director.
During the three months ended March 31, 2024 and 2023, the Company incurred rent expense in total of $
NOTE 11 - LIABILITY FOR RIGHT-OF-USE BUILDING
Supplementary information on the Company’s operating lease liabilities for the three months ended March 31, 2024 and 2023 included the following:
| 2024 | 2023 | |||||||
| Interest expense | $ | $ | ||||||
| Depreciation | $ | $ | ||||||
| Finance lease-related expenses included in accounts payable and accrued liabilities | $ | $ | ||||||
| 16 |
|
CANNAPHARMARX, INC. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 |
NOTE 12 - STOCKHOLDERS’ DEFICIT
Preferred stock
The Company is authorized to issue up to shares of one or more series of preferred stock at a par value of $ per share. The Board of Directors may, without stockholder approval, determine the dividend rates, redemption prices, preferences on liquidation or dissolution, conversion rights, voting rights, and any other preferences.
Series A preferred stock
In April 2018, the Company issued shares of its series A convertible preferred stock (“Series A Stock”) for $ per share to certain investors who then became members of management and the Board of Directors. Each share of Series A Stock is non-redeemable, entitles the holder to 1,250 votes on all matters submitted to a vote of the shareholders; is convertible into 1,250 shares of common stock and each vote is on an as-converted basis. In addition, the holders of outstanding Series A Stock will only be entitled to receive dividends upon declaration by the Board of Directors of a dividend payable on the Company’s common stock, whereupon the holders of the Series A Stock will receive a dividend on the number of shares of common stock into which each share of Series A Stock is convertible.
The beneficial conversion feature (“BCF”) attributed to the purchase of Series A Stock was deemed to have no value on the date of purchase because there was no public trading market for the Series A Stock, and none is expected to develop in the future. Therefore, the BCF related to the Series A Stock was considered to have no value on the date of issuance.
During the three months ended March 31, 2024, shares of Series A Stock were converted into common stock. There were no conversions during the year ended December 31, 2023. As at March 31, 2024, and December 31, 2023, and shares, respectively, of Series A Stock were issued and outstanding.
Series B preferred stock
In August 2019, the Company closed an offering of up to $3 million of units at a price of $1.00 per unit. Each unit consisted of one share of series B convertible preferred stock (“Series B Stock”) and one common stock purchase warrant (“Common Warrant”) with no expiry date. Each Series B Stock is convertible into one share of the Company’s common stock at the election of the holder.
Each Common Warrant is exercisable to purchase
one share of common stock at the election of the holder at an exercise price of $2.00 per share, which offering is to be offered only
to “accredited investors,” as that term is defined in Rule 501 of Regulation D of the Securities and Exchange Commission regulations.
As at December 31, 2020, the Company had accepted $
During the three months ended March 31, 2024, the Company cancelled shares of Series B Preferred Stock originally issued during the year ended December 31, 2022 as a deposit on the acquisition of LTB were cancelled. During the three months ended March 31, 2023, Series B Stock was converted into common stock at $0.0001 per common share.
As at March 31, 2024, (December 31, 2023 - ) shares of Series B Stock and Common Warrants were issued and outstanding.
Series C preferred stock
In March 2023, the Company issued shares of its Series C preferred stock (“Series C Stock”) in connection with the investment in LTB (Note 6). The shares of Series C Stock are each convertible into 1,250 shares of the Company’s common stock.
| 17 |
|
CANNAPHARMARX, INC. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 |
NOTE 12 - STOCKHOLDERS’ DEFICIT (continued)
Series C preferred stock (Contd.)
Each share of Series C Stock entitles the holder to 1,250 votes on all matters submitted to a vote of the shareholders; is convertible into 1,250 shares of common stock and each vote is on an as-converted basis. In addition, the holders of outstanding Series C Stock will only be entitled to receive dividends upon declaration by the Board of Directors of a dividend payable on the Company’s common stock, whereupon the holders of the Series C Stock will receive a dividend on the number of shares of common stock into which each share of Series C Stock is convertible.
As at March 31, 2024 and December 31, 2023, shares of Series C Stock were issued and outstanding.
Common stock
The Company is authorized to issue shares of common stock at a par value $ per share. As at March 31, 2024, (December 31, 2023 - ) shares of common stock were issued and outstanding.
Stock purchase warrants
A summary of the Company’s stock purchase warrant activity is as follow:
| Number of stock purchase warrants | Weighted average exercise price | |||||||
| Stock purchase warrants outstanding December 31, 2022 | $ | |||||||
| Stock purchase warrants issued | ||||||||
| Stock purchase warrants outstanding December 31, 2023 | $ | |||||||
| Stock purchase warrants redeemed | ( | ) | ||||||
| Stock purchase warrants outstanding March 31, 2024 | $ | |||||||
A summary of the Company’s number of stock purchase warrants outstanding and exercisable for period ended March 31, 2024 is as follows:
| Number of stock purchase warrants | Weighted average exercise price | Weighted average remaining life (Years) | ||||||||||
| July 2, 2024 | $ | |||||||||||
| May 10, 2026 | $ | |||||||||||
| February 15, 2028 | $ | |||||||||||
| November 22, 2028 | $ | |||||||||||
During the three months ended March 31, 2024,
nil warrants were issued. During the year ended December 31, 2023, warrants, each entitling the holder to purchase one common
stock of the Company at $ per share, with a termination date of
| 18 |
|
CANNAPHARMARX, INC. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 |
NOTE 12 - STOCKHOLDERS’ DEFICIT (continued)
During the year ended December 31, 2023, the Company
corrected an error in the accounting treatment associated with the warrants that were issued during the year ended December 31, 2019 as
origination fees associated with a promissory note and loan granted during that year. The value of the warrants should have been expensed
upon issuance. The correction of the error resulted in a $
NOTE 13 - INCOME TAX
As at December 31, 2023, the Company had approximately
$
The tax years from 2014 and forward remain open to examination by federal and state authorities due to net operating loss and credit carryforwards. The Company is currently not under examination by the Internal Revenue Service or any other taxing authorities. Since the company has never been profitable, the Company has established a full valuation allowance against the deferred tax asset associated with the NOLS.
NOTE 14 - GENERAL AND ADMINISTRATIVE
A summary of the Company’s general and administrative expenses for the three months ended March 31, 2024 and 2023 is as follows:
| 2024 | 2023 | |||||||
| Advertising and promotion | $ | $ | ||||||
| Insurance | ||||||||
| Interest and bank charges | ||||||||
| Office and administrative | ||||||||
| Plant supplies | ||||||||
| Repairs and maintenance | ||||||||
| Transfer agent fees | ||||||||
| Utilities | ||||||||
| $ | $ | |||||||
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Effective February 1, 2023, the Company entered into a lease agreement to lease one office at Suite 3600, 888 5th Avenue SW, Calgary, Alberta, Canada, T2P 3R7. The rent is $500 CAD per month. This space was provided by a company to which Mr. Orman, one of the Company’s directors, serves as a director.
NOTE 16 - SUBSEQUENT EVENTS
From March 31, 2024 through June 25, 2024, the Company issued 102,857,140 common shares to convertible lenders to retire approximately $72,000 in convertible debt.
| 19 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company’s financial condition and results of operations should be read together with the Company’s financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and related footnotes included in our Transition Report on Form 10-K for the year ended December 31, 2023.
In connection with, and because we desire to take advantage of, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward-looking statements in the following discussion and elsewhere in this Report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on our behalf. We disclaim any obligation to update forward-looking statements.
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes a number of “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, including statements concerning anticipated financial results and developments of our operations in future periods that reflect management's current views with respect to future events and financial performance. Forward-looking statements are projections in respect of future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology. These statements include statements regarding the intent, belief or current expectations of us and members of our management team, as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks set forth in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 as filed with the U.S. Securities and Exchange Commission (the “SEC”) on June 25, 2024 any of which may cause our company’s or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied in our forward-looking statements. These risks and factors include, by way of example and without limitation:
| · | our ability to successfully commercialize our products and services on a large enough scale to generate profitable operations; | |
| · | our ability to maintain and develop relationships with customers and suppliers; | |
| · | our ability to successfully integrate acquired businesses or new brands; | |
| · | the impact of competitive products and pricing; | |
| · | supply constraints or difficulties; | |
| · | the retention and availability of key personnel; | |
| · | general economic and business conditions; | |
| · | substantial doubt about our ability to continue as a going concern; | |
| · | our need to raise additional funds in the future; | |
| · | our ability to successfully recruit and retain qualified personnel in order to continue our operations; | |
| · | our ability to successfully implement our business plan; | |
| · | our ability to successfully acquire, develop or commercialize new products and equipment; | |
| · | intellectual-property claims brought by third parties; and | |
| · | the impact of any industry regulation. |
| 20 |
This list is not exhaustive of the factors that may affect the Company’s forward-looking statements. Although the Company has attempted to identify important factors that could cause actual results to differ materially from those described in forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated or intended. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, believed, estimated or expected. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Except as required by law, the Company disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. The Company qualifies all the forward-looking statements contained in this Quarterly Report on Form 10-Q by the foregoing cautionary statements.
During the three months ended March 31, 2024 the Company had $25,839 (2023 - $nil) of revenues from operations. Loss from operations for the three months ended March 31, 2024 was $ 790,195 (2023 - $720,277). Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, or performance. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
Readers are urged to carefully review and consider the various disclosures made by us in this Report and in our other reports filed with the SEC. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time except as required by law. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions.
As used in this Quarterly Report on Form 10-Q and unless otherwise indicated, the terms “CannaPharmaRX”, CANNAPHARMARX”, the “Company”, “we”, “us”, and “our” refer to CannaPharmaRX, Inc. and our wholly owned subsidiaries. Unless otherwise specified, all dollar amounts are expressed in United States dollars (“USD”).
OVERVIEW AND HISTORY
CannaPharmaRX Inc. (“CPRX” or the “Company”) was originally incorporated in the state of Colorado in August 1998 as Network Acquisitions, Inc. and changed its name to Cavion Technologies, Inc. (“Cavion”) in February 1999. The Company focuses its business efforts on evaluation, negotiation, acquisition, and development cannabis cultivation projects in Canada.
On January 6, 2022, the Company entered into a 20-year operating lease with Formosa Mountain Ltd., whose principal shareholder is also the principal shareholder of Koze, to lease a 55,000 square foot cannabis production facility in Cremona, Alberta, Canada. CPRX recommissioned the facility into a new indoor cannabis farm with 11 growing rooms and 10 drying and packing rooms during 2022.
CPRX recommissioned the 55,000 square foot facility which contains 11 growing rooms and 10 drying and packing rooms into a new indoor cannabis farm during 2022. The Company received an operating license from Health Canada on December 9, 2022, and a cannabis license from the Canada Revenue Agency (“CRA”) on December 22, 2022.
On February 21, 2023, the Company entered into a supply agreement with Y.S.A. Holdings Ltd (“Y.S.A.”), an Israeli corporation, whereby the Company will supply 450kg of cannabis biomass in the form of dried flowers and dried trim per annum to Y.S.A over a two-year period. No biomass has been delivered to Y.S.A as at the date of this Report.
Under the new license the Company commenced production during the year ended December 31, 2023.
| 21 |
PLAN OF OPERATION
The Company received an operating license from Health Canada on December 9, 2022, and a cannabis license from the Canada Revenue Agency (“CRA”) on December 22, 2022.
We anticipate developing a consistent cadence of growing, harvesting, cultivating, and delivering world class products on a regular basis and expects to begin to see a strong and accelerated revenue increase during the 2024 fiscal year (“FY2024”). Our production facility is expected to be operating at maximum capacity during FY2024, achieving regular plantings with staggered production so that we are constantly harvesting and delivering high-quality products to multiple sources. Our focus continues to be on international sales with high gross margin products, resulting in greater profitability using our state-of-the-art production facility to grow on demand against purchase contracts using smart inventory management which will contribute to higher turnover and regular deliveries. We will continue to collaborate with international partners on multiple continents and develop proprietary online, data-driven technology.
Our FY2024 growth goals include delivering the first of several harvests during the first and second quarter; increasing our strategic partner network; receiving our European Union license for Good Manufacturing Practices (“GMP”) to allow us to expand distribution; expanding our customer network; becoming a world leader in unique genetic strains with a current catalogue of over 500 desirable strains developed and owned by CPRX; and continuing to improve our balance sheet.
In support of these goals:
| · | On February 21, 2023, the Company entered into a supply agreement with Y.S.A. Holdings Ltd (“Y.S.A.”), an Israeli corporation, whereby the Company will supply 450kg of cannabis biomass in the form of dried flowers and dried trim per annum to Y.S.A over a two-year period. No biomass has been delivered to Y.S.A as at the date of this Report. | |
| · | On February 16, 2024, the Company announced that we finalized a strategic supply agreement with Cantek Holdings, an Israeli corporation, whereby the Company will supply 1,000kgs of product annually. | |
| · | On February 23, 2024, the Company announced that we successfully obtained our Israel Medical Cannabis (“IMC”) Good Agricultural Practices (“GAP”) and Good Agricultural and Collection Practices (“GACP”) certifications. The IMC-GAP and IMC-GACP certifications are the standard for cannabis certification in Israel and are required for CPRX to sell cannabis in Israel, a world leader in the medical cannabis industry. | |
| · | On March 5, 2024, the Company announced that we finalized a supply agreement with ICAN Green S.A. de C.V. (“ICAN”), a division of ICAN Investing Group LLC to supply product for distribution in the Latin Americas with a primary focus on Mexico and Panama. The agreement is subject to certain minimum required annual levels of purchases by ICAN. | |
| · | On March 11, 2024, the Company shipped its first product to a Canadian LP for distribution within Canada. |
Recent Funding
During the three months ended, the Company issued $213,488 in new convertible debentures to accredited investors with immediate maturity and interest rates of 10% and converted $69,910 of the outstanding convertible notes into Common Shares.
During the year ended, December 31, 2023, the Company issued $213,750 in new convertible debentures to accredited investors with 12 month terms to maturity and interest rates between 10% and 12%, and converted $222,096 of the outstanding convertible notes into Common Shares.
Going Concern
Substantial doubt exists as to our ability to continue as a going concern based on the fact that we do not have adequate working capital to finance our day-to-day operations. For the three months ended March 31, 2024 and 2023, the Company reported $25,839 and $nil, respectively, in revenue.
| 22 |
The Company’s deficit of $102,993,986 as at March 31, 2024 indicates substantial uncertainty about the Company’s ability to continue as a going concern. Management’s plans include engaging in further research and development and raising additional capital in the short term to fund such activities through sales of its common stock. Management’s ability to implement its plans and continue as a going concern may be dependent upon raising additional capital. Our continued existence depends on the success of our efforts to raise additional capital necessary to meet our obligations as they come due and to obtain sufficient capital to execute our business plan. We may obtain capital primarily through issuances of debt or equity or entering into collaborative arrangements with corporate partners. There can be no assurance that we will be successful in completing additional financing or collaboration transactions or, if financing is available, that it can be obtained on commercially reasonable terms. If we are not able to obtain the additional financing on a timely basis, we may be required to further scale down or perhaps even cease the operation of our business. The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments. Our financial statements do not include adjustments that might result from the outcome of this uncertainty.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2024 and 2023
The Company has commenced actively marketing products approved by Health Canada.
During the three months ended March 31, 2024 and 2023, the Company’s financial results are as follows:
Revenue
During the three months ended March 31, 2024 and 2023, the Company reported revenue of $25,839 and $nil, respectively, due to the commencement of product sales during the current quarter.
Cost of Goods Sold
During the three months ended March 31, 2024 and 2023, the Company reported cost of goods sold of $463,248 and $nil, respectively, due to the commencement of product sales during the current quarter.
Gross Loss
During the three months ended March 31, 2024 and 2023, the Company reported a gross loss of $437,409 and $nil, respectively.
Operating Expenses
The summary of the Company’s operating expenses for the three months ended March 31, 2024 and 2023 is as follows:
| 2024 | 2023 | |||||||
| Amortization and depreciation | $ | 23,041 | $ | 73,399 | ||||
| General and administrative | 208,549 | 249,699 | ||||||
| Payroll and consulting fees | 97,599 | 323,140 | ||||||
| Professional fees | 22,485 | 26,201 | ||||||
| Rent | 1,112 | 2,593 | ||||||
| Stock based compensation | – | 45,245 | ||||||
| $ | 352,786 | $ | 720,277 | |||||
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During the three months ended March 31, 2024 and 2023, the Company’s operating expenses consisted primarily of amortization and depreciation, general and administrative expenses, payroll and consulting fees, and professional fees associated with the costs for services or employees in finance, accounting, sales, administrative activities and the compliance of a public company. Overall operating expenses for the three months ended March 31, 2024 were $352,786 compared to operating expenses of $720,277 in the prior year comparable period, a decrease of $367,491. The decrease is primarily attributable the following:
| · | A $50,358 decrease to amortization and depreciation primarily due to allocation of a portion of the expense to inventory. | |
| · | A $41,150 decrease to general and administrative expenses primarily due to a reduction in advertising and promotion expenditures, an overall decrease in discretionary and extraneous spending, and allocation of a portion of the expenses to inventory. | |
| · | A $225,541 reduction in payroll and consulting fees primarily due to a change in management which resulted in a reduction in payroll accruals for officers, and to allocation of a portion of the expenses to inventory. | |
| · | A $3,716 decrease in professional fees due to transition of accounting to a single provider and an overall reduction in legal counsel usage and therefore fees during the three months ended March 31, 2024. |
Other income (expense)
The summary of the Company’s other income (expense) for the three months ended March 31, 2024 and 2023 is as follows:
| 2024 | 2023 | |||||||
| Change in the fair value of derivative liability | $ | (8,036,332 | ) | $ | 236,256 | |||
| Change in the fair value of obligation to issue shares | (2,710,879 | ) | – | |||||
| Gain (loss) on extinguishment of debt | 677,288 | (390,447 | ) | |||||
| Interest expense | (576,423 | ) | (459,345 | ) | ||||
| Loss on impairment of inventory | (279,092 | ) | – | |||||
| Loss on impairment of investment | – | (78,760 | ) | |||||
| $ | (10,925,438 | ) | $ | (692,296 | ) | |||
Other expense was $10,925,438 for the three months ended March 31, 2024 compared to other expense of $692,296 in the prior year comparable period, resulting in an increase of $10,233,142. The increase is primarily attributable the following:
| · | A $ 8,272,588 decrease in change of fair value of derivative liability primarily due to the increase of the Company’s share price which resulted in a change in the stock price input and volatility input used in the Black Scholes option pricing model, which resulted in a substantial increase in the derivative liability value for the period. | |
| · | A $ 2,710,879 decrease in change in the fair value of obligation to issue shares primarily due to the increase of the Company’s share price which resulted in a change in inputs into the valuation model related to the obligation to issue shares, increasing the value of the obligation to issue shares for the period. | |
| · | A $1,067,735 increase in the gain (loss) on extinguishment of debt primarily due to reversal of an accrual for penalties upon the settlement of certain convertible notes and settlement through conversion of certain convertible notes. |
Net Loss
As a result of the foregoing, during the three months ended March 31, 2024, the Company experienced a net loss of $11,594,301 or $0.03 per share compared to a net loss of $1,418,229 or $0.00 in the prior year comparable period.
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LIQUIDITY AND CAPITAL RESOURCES
The summary of the Company’s cash flows for the three months ended March 31, 2024 and 2023 is as follows:
| 2024 | 2023 | |||||||
| Cash used in operating activities | $ | (548,829 | ) | $ | (611,738 | ) | ||
| Cash used in investing activities | – | (893 | ) | |||||
| Cash provided by financing activities | 560,272 | 493,309 | ||||||
| $ | 11,443 | $ | (119,322 | ) | ||||
As of March 31, 2024, the Company had $12,093 in cash as compared to $nil in the previous comparable period.
Cash flows from operating activities
Cash used in operating activities for the three months ended March 31, 2024 decreased by $62,910 compared to the prior year comparable period primarily due to cash management techniques employed to reduce the overall spend in the current quarter.
Cash flows from investing activities
Cash used in investing activities for the three months ended March 31, 2024 decreased by $893 compared to the prior year comparable period due to a reduction in purchases of property, plant and equipment in the current quarter.
Cash flows from financing activities
Cash provided by financing activities for the three months ended March 31, 2024 increased by $66,963 compared to the prior year comparable period primarily due to an increase of $516,995 in proceeds from related party loans, offset by a decrease of $451,282 from repayment of convertible notes.
In general, based on historical losses, the Company will be required to continue raising operating capital through debt and equity.
Currently, the Company has no committed source for any funds to allow completion of any of our proposed acquisitions or projects in progress. No representation is made that any funds will be available when needed. In the event funds cannot be raised as required, we may not be able to carry out our business plan. Our inability to obtain funding for our projects will have a negative impact on our anticipated results of operations.
Subsequent Events
From March 31, 2024 through June 25, 2024, the Company issued 102,857,140 common shares to convertible lenders to retire approximately $72,000 in convertible debt.
Inflation
Although our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on our results of operations during the three-month period ended March 31, 2024.
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Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The following represents a summary of our critical accounting policies, defined as those policies that we believe are the most important to the portrayal of our financial condition and results of operations and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.
Recently Issued Accounting Pronouncements
Management has reviewed all other recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption of any such pronouncements may be expected to cause a material impact on our financial condition or the results of our operations.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources and would be considered material to investors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is classified as a smaller reporting company and is not required to provide the information under this item pursuant to Regulation S-K.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures - Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as at the end of the period covered by this Report.
These controls are designed to ensure that information required to be disclosed in the reports we file or submit pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Based on this evaluation, and evidenced by our late filing of the December 31, 2023 10-K, our CEO and CFO concluded that our disclosure controls and procedures were not effective as at December 31, 2023 at the reasonable assurance level.
We have implemented new procedures for the period ended March 31, 2024 to mitigate this ineffectiveness and will continue to monitor their effectiveness. We believe that our financial statements presented in this Form 10-Q fairly present, in all material respects, our financial position, results of operations, and cash flows for all periods presented herein.
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Inherent Limitations - Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdown can occur because of simple error or mistake. In particular, many of our current processes rely upon manual reviews and processes to ensure that neither human error nor system weakness has resulted in erroneous reporting of financial data.
Changes in Internal Control over Financial Reporting - Other than an emphasis on timely filing, there were no changes in our internal control over financial reporting during the period ended March 31, 2024, which were identified in conjunction with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As part of our acquisition of AMS, we assumed an action filed against AMS by Ataraxia Canada, Inc. (“Ataraxia”), alleging breach of contract, specifically, breach of a non-binding term sheet providing for Ataraxia to acquire controlling interest in AMS. Ataraxia is seeking $15 million in damages. A Statement of Claim was prepared by Ataraxia, as plaintiff, and circulated to AMS, as defendant, on August 2, 2018, under the Ontario Superior Court of Justice (Court file no. CV-17-580157). The parties have engaged in discussions with respect to a potential settlement of this matter. Counsel has advised that it believes it is premature to speculate on any outcome of this litigation, including the likelihood of a settlement or any potential liability at this time.
Our agreement to acquire AMS contained a provision requiring us to diligently defend against the claims brought forth in, and assume full and complete control of, the Ataraxia litigation, provided that we shall not enter into any compromise or settlement in respect of the Ataraxia litigation without the prior written consent of the sellers, which consent is not to be unreasonably withheld, conditioned or delayed. The sellers are obligated to cooperate fully and make available to us all pertinent information and witnesses under their control, make such assignments and take such other steps as in the opinion of our counsel are reasonably necessary to enable us to defend against the claims brought forth in the Ataraxia litigation.
We are currently reviewing two separate situations with our legal counsel in order to ascertain whether we have claims against Steven Barber arising out of his default of the Consulting Agreement we entered into as part of the AMS acquisition more fully described in” Part I, Item 1,” Business, above and various claims against Gary Herick, a former officer and director. In January 2020, we received correspondence from counsel for Mr. Barber demanding payment on amounts purported to be due pursuant to his Consulting Agreement with us. We are currently reviewing whether Mr. Barber has performed pursuant to the terms of the Consulting Agreement.
No decision on whether to proceed on either of these situations has been reached as at the date of this Report.
On April 15, 2021, Bristol Capital Investors, LLC (BCI) filed a lawsuit in the Superior Court of the State of California, County of Los Angeles against CannaPharmaRX Inc. and Does 1 - 50, inclusive (Case No. 21st CV1 3696). The lawsuit alleges that CPRX breached the Amended and Restated Limited Liability Company Membership Purchase Agreement it had entered into with Bristol Capital Investors, LLC (BCI) to purchase BCI’s interest in Ramon Road Production Campus, LLC (RRPC), a single asset entity which owned an improved property, known as the Glass House, located in Cathedral City, California. BCI alleges causes of action for Fraud, Breach of Contract, Breach of the Implied Covenant of Good Faith and Fair Dealing, and Negligent Misrepresentation, and seeks compensatory and consequential damages in the amount of $10.5 million dollars plus attorneys’ fees and costs. CPMD intends to vigorously defend against BCI’s lawsuit, going forward. The parties conducted a court-ordered mediation, and the parties are engaging in on-going discussions.
We are not a party to any other legal proceeding or aware of any other threatened action as at the date of this Report.
ITEM 1A. RISK FACTORS
We are a smaller reporting company and are not required to provide the information under this item pursuant to Regulation S-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2024, the Company issued 101,496,114 common shares pursuant to conversions of convertible debt to common stock. The Company also exchanged 10,000 shares of Preferred A Stock for 12,500,000 shares of common stock, and executed a cashless exercise of approximately 5,000,000 warrants for 4,895,849 shares of common stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
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ITEM 4. MINE SAFETY DISCLOSURE
Not Applicable
ITEM 5. OTHER INFORMATION
During the three months ended March 31, 2024, no
director or officer
ITEM 6. EXHIBITS
| Exhibit No. | Description | |
| 31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (formatted in IXBRL, and included in exhibit 101). |
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on June 25, 2024.
| CannaPharmaRx, Inc. | ||
| By: | /s/ Dean Medwid | |
| Dean Medwid, | ||
| Principal Executive Officer | ||
| By: | /s/ Oliver Foeste | |
|
Oliver Foeste, Principal Financial Officer | ||
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